System and method for implementing and managing bundled option box futures

ABSTRACT

A system and method of providing a collateralized loan utilizing a clearing counterparty is disclosed. The system includes a match engine module to receive an order for a bundled box spread future representative of the collateralized loan via an options box spread. The order specifies an interest rate associated with the collateralized loan as the price of the futures contract. A trade database identifies a bundled box spread future associated with the received order and interest rate and an order book module identifies a standing order that is compatible with the received order. A clearing module credits an account with a loan amount based on the identified bundled option box future. A risk management module credits a margin amount to reflect the collateralized loan and associated collateral assets.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application is a continuation of, and claims the benefit ofpriority to U.S. Pat. No. ______ (U.S. patent application Ser. No.13/759,605, filed Feb. 5, 2013), which is a continuation of U.S. Pat.No. 8,374,953 (U.S. patent application Ser. No. 12/911,516, filed Oct.25, 2010), issued Feb. 12, 2013, the entirety of which is incorporatedby reference herein.

BACKGROUND

A box spread is a known tool in option trading. A box spread is acombination of four distinct option positions having a common expirationdate. This combination of four option positions will dictate that, atthe expiration, the seller of the box spread shall return a fixed sum ofmoney to the buyer of the box spread, regardless of what the price ofthe underlying asset is at that point in time. The initial price of thebox is thus the net present value, at the time of the box spread trade,of the fixed sum to be repaid by the seller to the buyer of the boxspread at the expiration. Typically, the initial price of the box spreadis below that of the sum to be prepaid on the expiration date,tantamount to applying a positive interest rate for the determination ofthe net present value.

Further, with an option box spread traded based on options listed at anexchange, the positions are novated to the clearing house associatedwith the exchange. The trade is guaranteed by the clearing house by theprocess of novation, i.e. substitution of the clearing house as thecounterparty of the trade for both the buyer and the seller. As such,the buyer and seller of the options box spread will no longer be exposedto the credit risk of the original counterparty. The clearing house, inturn, manages risk by requiring the market participants to transfersufficient collateral to guarantee the performance of each counterparty.In the case of an option box spread trade, the buyer posts cash dictatedby the price of the box spread, while the seller of the box spread postssufficient collateral, typically securities with a liquid market, toguarantee the repayment amount at the expiration of the options. Assuch, the arrangement is tantamount to a loan from the buyer of the boxspread to the seller of the box spread, with the exchange clearing housestanding in the middle to serve as a custodian and manager of thecollateral posted by the seller of the box spread.

Given that the option box spread is equivalent to a collateralizedborrowing/lending transaction, the most relevant basis for tradenegotiation would be the interest rate for the loan. With the interestrate embedded in the discounted value, the fluctuation of the interestrate becomes obscured by the passage of time, for example. It would bedesirable to provide a system and method to facilitate listing, quotingand trading box spreads in the most appropriate quoting convention, aswell as to provide a facility to trade the box spread on a forwardbasis.

BRIEF DESCRIPTION OF THE DRAWINGS

Examples of the invention are described with reference to theaccompanying drawings, in which components, features and integral partsthat correspond to one another each have the same reference number,wherein:

FIG. 1 illustrates an exemplary system for implementing a bundled optionspread in accordance with the disclosure presented herein;

FIG. 2 illustrates an exemplary match system which may be implemented inconnection with the system shown in FIG. 1;

FIG. 3 illustrates an exemplary ordering method for bundled box optionspreads which may be implemented in connection with the system shown inFIG. 1;

FIG. 4 illustrates effective face values of loans to bundled box optionspreads based on options on standard S&P 500 index futures;

FIG. 5 illustrates implicit minimum ticks associated with an exemplarybundled box option spread based on options on standard S&P 500 indexfutures;

FIG. 6 illustrates an exemplary bundled box option spread deliverablefor the box spread futures; and

FIG. 7 illustrates an exemplary order process by which an order for anexemplary box spread future may be executed.

DETAILED DESCRIPTION

Bundled option box futures or bundled box futures provide anadvantageous way of listing, quoting and trading box spreads thatfacilitate use of boxes in the context of borrowing and lendingactivities.

FIG. 1 illustrates an exemplary exchange computer system 100 or tradingnetwork configured to allow users to exchange trading informationrelated to bundled box futures. The exemplary exchange computer systemor trading network 100 may be configured to receive orders and transmitmarket data related to orders, trades and related information. Exchangecomputer system 100 may be implemented with one or more mainframes,servers, gateways, controllers, desktops or other computers.

The exchange computer system or trading network 100 may include a userdatabase 102 configured to store and index information identifyingtraders, investors and other users of the system. The user database 102may further store and index user names, passwords associated with useraccounts stored in an account data module 104. The account data module104 may process account information utilized during trades, clearingand/or margining operations.

The exchange computer system or trading network 100 may further includea match engine module 106, a trade database 108, an order book module110, and a market data module 112. Match engine module 106 may beconfigured to match bid and offer prices. Match engine module 106 may beimplemented with software that executes one or more algorithms formatching bids and offers. Match engine module 106 may be configured toexecute operations, algorithm and programs to implement and processtrades for the clearinghouse. Trade database 108 may store informationidentifying trades and descriptions of trades. In particular, tradedatabase 108 may store information identifying or associated with thetime that a trade took place and the contract price. The order bookmodule 110 may be configured to compute or otherwise determine currentbid and offer prices. A market data module 112 may be included tocollect market data and prepare the data for transmission to users. Arisk management module 134 may be included to compute and determine auser's risk utilization in relation to the user's defined riskthresholds.

The exchange computer system or trading network 100 may further includean order-processing module 136, a clearing module 180 and/or apost-trading module 182. The order-processing module 136 may beconfigured to decompose delta-based and bulk order types for processingby order book module 110 and match engine module 106. The clearingmodule 180 may be configured to clear outstanding positions on acontract settlement day or any other trading day. The post-tradeprocessing module 182 may further be configured to generate reports andenumerate details of the trades that may fulfill delivery obligations.

FIG. 1 further illustrates computers, terminal and other devices 114,116, 118, 120 and 122. The computers, terminal and other devices 114,116, 118, 120 and 122 may include one or more central processors, orcontrollers, coupled to one or more system buses that connect thecentral processor to one or more communication components, such as anetwork card or modem. The computers, terminal and other devices 114,116, 118, 120 and 122 may further include interface units, drives,memory and storage modules for reading, writing storing data andcomputer executable instructions. Depending on the type of computerdevice, a user can interact with the computer with a keyboard, pointingdevice, microphone, pen device or other input device.

Computer device 114, in this exemplary embodiment, is in communicationwith the exchange computer system 100 via, for example, a T1 line, awide area network (WAN), a local area network (LAN), a wireless localarea network (WLAN) compliant with IEEE 802.11x or other communicationstandards capable of communicating or transporting the financialinformation utilized by the exchange computer system or trading network100. Computer device 114 may further be in communication with a traderor exchange employee via a radio 132. The radio user may transmit ordersor other information to a user of computer device 114 that, in turn, maythen transmit the trade or other information to exchange computer system100. As shown in FIG. 1, wireless communications and/or wirelesscommunication channels are illustrated as dashed lines coupling two ormore illustrated elements.

Computer devices 116 and 118 communicatively couple to the exchangecomputer system 100 via a local area network (LAN) 124. LAN 124 may haveone or more of the known LAN topologies and may use a variety ofdifferent protocols, such as Ethernet, IEEE 802.11 (Wi-Fi), IEEE 802.16(WiMAX). Wireless personal digital assistant device (PDA) 122 maycommunicate with LAN 124 or the Internet 126 via, for example, Wi-Fiand/or WiMAX communication protocols. PDA 122 may further communicatewith exchange computer system 100 via wireless hub 128. PDA is definedbroadly to include mobile telephones such as smart phones and otherwireless devices, netbooks, tablet computers or other devices capable ofcommunicating with the LAN 124 or wireless hub 128.

FIG. 1 further illustrates LAN 124 coupled to the Internet 126.Communication within the LAN 124 and between the Internet 126 may befacilitated by routers, domain name servers, gateways, virtual privatenetwork (VPN) servers, storage devices and other known networkingequipment.

One or more market makers 130 may maintain a market by providingsubstantially constant bid and offer prices for a financial instrument,such as a derivative or security, to exchange computer system 100.

Exchange computer system 100 may also exchange information with otherexchanges, markets represented by trade engine 138. Additional computersand systems such as, for example, clearing, regulatory and fee systems,may be coupled to exchange computer system 100 in the manner describedabove.

The operations of computer devices and systems shown in FIG. 1 may becontrolled or directed by computer-executable instructions stored oncomputer-readable medium and executed by one or more processors. Forexample, computer device 116 may include computer-executableinstructions for receiving order information from a user andtransmitting that order information to exchange computer system 100. Inanother example, computer device 118 may include computer-executableinstructions for receiving market data from exchange computer system 100and displaying that information to a user.

Additional servers, computers, handheld devices, personal digitalassistants, telephones and other devices may also be connected toexchange computer system 100. Moreover, the topology shown in FIG. 1 ismerely an example and that the components shown and described inconnection with the exemplary topography may be reconfigured andrearranged into different topologies and configurations.

FIG. 2 illustrates an exemplary match system 200 that may be implementedto list, record, track and match orders and/or trades for bundled optionbox futures and the futures to which they relate. The match system 200includes a front end clearing application 202 configured to receivetrade data 204. Trade data 204 may include information that identifiesan order for a futures contract such as the bundled option spreadscontract discussed and disclosed herein. For example, the match system200 may utilize trade data 204 representative of, for example, astandard S&P 500 futures contract which are listed on each trading dayof the year by CME. Each contract is available from 8:30 am to 3:15 pm(CT) and may be traded on an electronic trading system such as theGlobex® electronic trading system.

The match system 200, in this exemplary embodiment, operates as acentral counterparty to each party of the contract. The centralcounterparty clears and ensures each trade handed by the match system200. The action of the central counterparty provides and/or ensurescapital efficiencies and minimizes risk for traders of the exchangetraded derivative contacts.

A match client 206 may contain application program interfaces and/orother software modules that allow front end clearing application 202 tocommunicate with a plurality of match servers 208 a and 208 b. A varietyof different match clients may be used to allow different front endclearing applications to communicate with match servers. For example, afirst front end clearing application may use a first match client tocommunicate with a set of match servers and a second front end clearingapplication may use a second match client to communicate with the sameset of match servers. Front end clearing application 202 is also coupledto an all trades database 210. All trades database 210 contains a masterrecord of all trades that have taken place.

FIG. 2 further illustrates a pair of match servers 208 a and 208 b. Eachof the match servers 208 a and 208 b may be in the same location or maybe geographically distributed. As previously discussed, a pair ofservers 208 a and 208 b are shown in this exemplary embodiment, but thisconfiguration may be scalable to include both fewer and multipleadditional services. Match servers 208 a and 208 b may each be connectedto one another, connected through a common hub or connected in anothermanner that allows each match server to communicate with the remainingmatch servers. Servers 208 a and 208 b contain modules for matchingorders, such as futures orders executed at an exchange. Server 208 aincludes a match module 212 a that may be implemented with a softwareapplication that matches unmatched trades. Match module 212 a mayinclude or be linked to a set of rules for matching orders. The rulesfor matching orders may identify specific match criteria used formatching specific orders. As described in detail below, a match modulemay use several different match criteria and the match criteria selectedmay be a function of the length of time that order data has remainedunmatched.

Server 208 b, in one exemplary embodiment, may include match modules 212b that may be similar to match module 212 a. The match modules 212 a and212 b may be used to match specific types of orders or trades that takeplace in specific locations. For example, match module 212 a may beconfigured to match orders that were executed at one exchange and matchmodule 212 b may be used to match orders that were executed at anotherexchange.

Servers 208 a and 208 b may receive and store trade data from front endclearing application 202 in caches 214 a and 214 b, respectively. In oneembodiment, each cache 214 a and 214 b contains all trade data, while inother embodiments the trade data may be distributed or parceled amongmultiple caches in one or more servers.

The match modules 212 a and 212 b and/or caches 214 a and 214 b maycommunicate using the Java Messaging Service standard publish andsubscribe application program interface (API). The type of informationthat may be exchanged includes information to add, update and removetrade and/or order data from caches 214 a and 214 b. Information may becommunicated in a variety of formats, for example, information may beexchanged identifying changed information, providing a complete copy ofthe cached information, partial updates of segments based on time oractivity or any other desired communication schedule or schema.

Servers 208 a and 208 b may further include aging queues 216 a and 216b. Each aging queue or book may contain trade data representative oforders that have not been matched. Each book may contain a unique subsetof unmatched trade data so that the workload is distributed acrossservers. In this way, different futures related to individual stockindexes may be handled by different books and aging queues deployed inone or more servers 208 a, 208 b to 208 x.

FIG. 3 illustrates an exemplary method 300 of matching orders inaccordance with an embodiment disclosed herein. At block 302 of themethod, order data is received at a match server identifying aparticular class, price and quantity for a bundled option box futures.The method, as shown in block 304 may utilize one or more of the matchmodules 212 and the match client 206 in an attempt to match the receivedorder data with other existing orders in the cache 214 and/or agingqueue or book 216. The method bifurcates at block 306 based on whetheror not the received order dated is matched by the match module 212and/or the match client 206. If the match is made, the method skipsahead to block 314. Conversely, if the match is not made, the methodcontinues to handle and process the received order data as discussed inblocks 308 to 312. In particular, the method at block 308 stores theunmatched order data in one or more of the aging queues or books 216.The order data, as shown in block 310, stored the unmatched order datafor a predetermined period.

The method bifurcates again as shown at block 312 based on adetermination of whether or not the order data stored within the agingqueue or book 216 has been matched after the predetermined period oftime shown in block 310. If the match is again not made, the methodreturned to block 310 to rest for a predetermined period. However, ifthe order data is matched, the method continues to the element or stepdiscussed in connection with the block 314. After the order data isdetermined to be match at either block 306 and the block 312, the methoddiscloses that the match data and match server state change informationor other update information may be transmitted to the match servers 208.

I. Box Spread Mechanics

As previously discussed, a box spread entails the simultaneous purchaseand sale of four options with the same expiration. There are typicallytwo strike prices involved. The higher of the two strike prices may beidentified as the high strike, and remaining strike price may beidentified as the low strike. The buyer of the options box spread may,for example, buy a call with the low strike, sell a put at the lowstrike, sell a call with the high strike and buy a put at the highstrike. For example, standard Mar-09 S&P 500 futures may have settled at1,061.70 on Feb. 4, 2010. There were 133 days until the Jun. 17, 2010expiration of the Mar-09 S&P 500 options. At the time, a trader may havebought an exemplary box spread by buying the 1,050 Mar-09 call, sellingthe 1,050 Mar-09 put, selling the 1,080 Mar-09 call and buying the 1,080Mar-09 put. Table 1 illustrates this exemplary box spread as:

TABLE 1 Buy 1,050 Jun-09 Call @ 63.50 pt = ($15,875) Sell 1,050 Jun-09Put @ 56.60 pt = $14,150 Sell 1,080 Jun-09 Call @ 47.00 pt = $11,750 Buy1,080 Jun-09 Put @ 70.00 pt = ($17,500) Initial Net Debt  ($7,475)

The exemplary box spread illustrated in Table 1 may have been purchasedfor an initial net debit of $7,475 ($250.times.29.90). But atexpiration, the box spread will be valued at the difference in strikeprices or $7,500 ($250.times.30 index points) in any circumstance.

Return on Box=Difference in Strikes−Initial Net Payment

If, in one scenario, the market trades to the lower of the two strikeprices by the common expiration date, the 1,050 struck options areat-the-money and worthless. The 1,080 call falls out-of-the-money andsimilarly expires worthless. The holder or owner of the box spread may,in turn, exercise the 1,080 put and recover the intrinsic value of$7,500 less the initial net debit of $7,475 for a profit of $25.

If, in another scenario, the market trades to the upper strike price bythe common expiration date, the 1,080 options are at-the-money andworthless. The 1,050 put falls out-of-the-money and similarly expiresworthless. The 1,050 call may be exercised to recover the intrinsicvalue of $7,500. The box generates a profit of $7,500 less the initialnet debit of $7,475, for a profit of $25.

Thus, the buyer of the box spread shown in Table 1 will always generate$25 in profit while the seller of the box will always generate a $25loss. The initial net debit of $7,475 for the buyer of the box spreadrepresents a credit of $7,475 for the seller of the box and may beconsidered a loan secured by the CME Group Clearing House via thefinancial safeguards offered therethrough. Translated intoborrowing/lending terms, the interest on the original $7,475 loan amountis $25. Alternatively, the eventual repayment of $7,500 was discountedto $7,475 at the time of the box spread trade, with $25 difference beingthe discount interest.

A. Calculating the Loan Rate

In the embodiment shown in Table 1, the difference between the paymentor loan of $7,475 at the initiation of the box spread and the receipt of$7,500 on the common expiration date implies a return of $25. In orderto determine the effective interest rate associated with the return, thefollowing formula may be applied:

$\begin{matrix}{{{Implicit}\mspace{14mu} {Rate}} = {\left( \frac{360}{days} \right) \times \left( \frac{{Return}\mspace{14mu} {on}\mspace{14mu} {Box}}{{Diff}\mspace{14mu} {in}\mspace{14mu} {Strikes}} \right)}} \\{= {\left( \frac{360}{133} \right) \times \left( \frac{\$ 25}{{\$ 7},500} \right)}} \\{= {0.902\%}}\end{matrix}$

In this embodiment, the $25 return represents interest accrued while theface value of the loan may be represented as the difference in strikeprices or $7,500. The loan term is 133 days. Based on these knownvalues, the effective interest rate may be calculated as 0.902%. The boxspreads may, in turn, be priced to reflect the discounted present valueof the difference in strike prices.

B. Discount Loan Structure

Returning to the example shown in Table 1, the interval between strikeprices of the options that comprised the box spread is 30 index points(1080−1050=30). The known contract multiplier for standard S&P 500options is $250.times. which, in turn, implies that $7,500($250.times.30 index points) may be from box seller to buyer at thecommon expiration date. The effective loan principal is, in thisexemplary embodiment, equal to the combined difference in strike prices.FIG. 4 illustrates loans that may be transacted by utilizing options atdifferent strike prices.

Box spreads constructed in this manner provide for a loan structuresimilar to a Treasury bill in that both are “discount” instruments thatare purchased at a value less than the stated face value. Upon maturity,bills call for the return of the stated face value. For example, aTreasury bill may be purchases for $995,000 and redeemed for a $1million after a 90-day period. Utilizing the implicit rate formulaprovided above, the rate on this transaction may be calculated as 2%.The effective rate on an exemplary box spread represents a “discountyield” (DY) similar to a quoted T-bill rate. The yield on a discountinstrument such as a Treasury bill or a box spread may not be directlycomparable to the quoted yield associated with an “add-on” instrumentsuch as Eurodollars which are quoted as a “money market yield” (MMY).The discount yield may be reconciled with a money market yield per thefollowing formula.

$\begin{matrix}{{MMY} = {{DY} \times \left( \frac{{Diff}\mspace{14mu} {in}\mspace{14mu} {Strikes}}{{{Diff}\mspace{14mu} {in}\mspace{14mu} {Strikers}} - {{Return}\mspace{14mu} {on}\mspace{14mu} {Box}}} \right)}} \\{= {0.902\% \times \left( \frac{{\$ 7},500}{{{\$ 7},500} - {\$ 25}} \right)}} \\{= {0.905\%}}\end{matrix}$

Thus, the discount yield of 0.902% associated with the exemplary boxspread discussed above may equate to a money market yield of 0.905%.

C. Quote Convention

Box spreads may be quoted in terms of option ticks noting that theminimum tick size in standard S&P 500 options is equal to 0.10 indexpoints or $25 ($250.times.0.10 index points). However, quoting boxspreads in terms of ticks is often difficult and/or confusing when thetransaction is the basis for a collateralized loan. Loans are typicallyquoted in terms an interest rate. Further, the typical tick size ofextant option contracts is so large that the minimum amount by which theimplicit interest rate may be adjusted may be extremely large. Loaninstruments, by way of comparison, are typically quoted in terms of aninterest rate, often in minimum increments of perhaps 0.01% (one basispoint) or 0.005% (one-half basis point) or even 0.0025% (one-quarterbasis point).

For example, returning to the box spread discussed above, assume thatthe value of the illustrated box spread changed by one minimum pricefluctuation of $25. The return on the box spread increases from $25 to$50 and the initial net payment decreases from $7,475 to $7,450. Theimplicit interest rate on the exemplary box spread, as shown below, maybe calculated to equal 1.804%.

$\begin{matrix}{{{Implicit}\mspace{14mu} {Rate}} = {\left( \frac{360}{133} \right) \times \left( \frac{\$ 50}{{\$ 7},500} \right)}} \\{= {1.804\%}}\end{matrix}$

Stated another way, the implicit rate increases from 0.902% to 1.804% (achange of +0.902%) given a one-tick fluctuation in the value of the box.For example, the implicit tick size of the box spread quoted in aninterest rate equals 90.2 basis points. The implicit minimum tick sizeof the loan is a function of the strike price interval (which furtherdefines the face value of the loan) and the days until loan maturity. Ageneralized formula for the implicit minimum tick may be expressed as:

$\begin{matrix}{{{Implicit}\mspace{14mu} {Trick}} = {\left( \frac{360}{days} \right) \times \left( \frac{{Tick}\mspace{14mu} {Value}}{{Diff}\mspace{14mu} {in}\mspace{14mu} {Strikes}} \right)}} \\{= {\left( \frac{360}{60} \right) \times \left( \frac{\$ 25}{{\$ 25},000} \right)}} \\{= {60\mspace{14mu} {basis}\mspace{14mu} {points}}}\end{matrix}$

FIG. 5 illustrates that the implicit minimum tick, quoted in basispoints on an annualized basis, of the exemplary box spread with strikesthat are 100 index points apart (a $25,000 loan=$250.times.100) with 60days until term equals 60 basis points. The implicit minimum tick of abox with strikes that are 2,000 index points apart (a $500,000loan=$250.times.100) with 180 days until term equals 1 basis point.Typically, the implicit minimum ticks associated with box spreads aretoo imprecise to provide for a competitive and precise lendingsituation. Moreover, in normal lending situations, the loan is quoted insuccessively finer increments as the term declines while the implicittick associated with boxes increases as the loan term declines.

II. Bundled Option Box Futures

In order to address the shortcomings of known box spreads, bundledoption box spreads have been developed. A bundled option box spread is afutures contract, hereafter referred to as box spread futures, thatcalls for the delivery of options on futures. In an exemplary bundledoption box future, strike prices may be fixed at a 2,000 index pointinterval with a specific option expiration from the expiration of thebox spread futures, e.g., 30-days, 60-days, 90-days. In order to providefor a $1,000,000 face value loan, bundled option box spread futures maycall for the delivery of two (2) option box spreads, assuming that thestandard S&P 500 index futures have multiplier of $250 per index point.The contract may be quoted in yields in minimum tick sizes of ¼th of onebasis point (0.0025%) to facilitate the use of option boxes as loaninstruments with a suitably calibrated tick size.

In an exemplary embodiment shown in FIG. 6, the exchange may list a boxspread futures contract that calls for the delivery of eight options.This exemplary futures contract may settle on Nov. 17, 2010 so thatthere is 30 days until the Dec. 17, 2010 expiration of the eight (8)European-style flex options that are delivered. Buying the exemplarybundled box futures contract, results in the purchase of two (2) longDec-10 calls struck at 50; two (2) short Dec-10 calls at 50; two (2)short Dec-10 calls at 2,050; and, two (2) long Dec-10 calls at 2,050.This implies a net debit of nearly $1 million. Thus, buying the bundledbox represents a loan of cash. Conversely, selling the exemplary bundledbox futures contract, results in the sale of the opposite positions.This implies a credit of $1 million. Thus, selling the bundled boxrepresents borrowed cash.

A. Quoting Bundled Box Futures

An exemplary bundled futures contract is quoted using the IMM Indexconvention, i.e., at 100 less an interest rate. The minimum increment ortick size shall be ¼ of one basis point (0.0025%). Based upon a $1million face value 30-day loan, the tick equates to a value of $2.0833.Similarly, the tick value of a 60-day bundled box futures contractequals $4.166 while a 90-day bundled box contract has a tick value of$6.25. For purposes of a daily mark-to-market, the tick is rounded tothe nearest penny.

$\begin{matrix}{{{Tick}\mspace{14mu} {Value}} = {0.0025\% \mspace{14mu} \left( \frac{Days}{360} \right) \times {Diff}\mspace{14mu} {in}\mspace{14mu} {Strikes}}} \\{= {0.0025\% \mspace{14mu} \left( \frac{30}{360} \right) \times {\$ 1},000,000}} \\{= {{\$ 2},0833}}\end{matrix}$

Assume that the contract is quoted at a value of 99.1225. This implies adiscount yield (DY) of 0.8775% or 87.75 basis points (=100−99.1225).Thus, the initial net debit (credit) upon purchase (sale) of the bundledbox spread equals $999,268.75. The interest associated with the loanequals $731.25 ($1,000,000−$999,268.75).

$\begin{matrix}{{Debit}\left( {{Credit} = {{Diff}\mspace{14mu} {in}\mspace{14mu} {{Strikes}\left\lbrack {D\; \gamma \times \left( \frac{Days}{360} \right) \times {Diff}\mspace{14mu} {in}\mspace{14mu} {Strikes}} \right\rbrack}}} \right.} \\{= {{{\$ 1},000,00} - \left\lbrack {0.8775\% \; \times \left( \frac{30}{360} \right) \times {\$ 1},000,000} \right\rbrack}} \\{= {{\$ 999},268.75}}\end{matrix}$

B. Settlement and Management of Bundled Box Futures

As previously discussed, a box spread future may be defined such thatdifference in strike prices may be fixed, an interest rate or cost ofthe loan is known and a specific option expiration from the expirationof the box spread futures, e.g., 30-days, 60-days, 90-days, is defined.FIG. 7 illustrates an exemplary order process 700 by which an order anddelivery process for an exemplary bundled box spread future may beprocessed by, for example, the trade database 108, the match enginemodule 106 and/or the order book module 110.

At step 702, an order for a bundled box spread future may be receivedand matched to a complimentary order resting in the order book module110 and/or received by the match engine module 106.

At step 704, the order book module 110 and/or the match engine module106 may execute the order for the box spread future based on thereceived terms.

At step 706, following the expiration of the bundled box spread futures,the clearinghouse may utilize the order book module 110 and one or morealgorithms implemented by the match engine 106 may be identified andretrieved by the long and short open interests. The final settlementprice of the futures contract will imply an interest rate for the periodor term of the box spread. The interest rate may be expressed, forexample, using the IMM Index convention described above.

The match engine module 106 may cooperate with, for example, the tradedatabase 108, order book module 110 and market data module 112 tospecify (a) the four options that form the options box spread; (b) theprice of the four options based on the input from trade database 108,order book module 110, and market data module 112, along with a pricingalgorithm or module configured to use the current market quotes from thefutures and options of the underlying index futures market input todetermine the individual price of the options in the options box spreadto be delivered; and amend one or more of the four option prices toensure that the resultant four options prices would imply an interestrate identical to that implied by the final settlement price of the boxspread futures. For example, three of the four option prices may bedetermined using known option pricing formulas and the fourth may bedetermined as a function of the net present value of the box spreadbased on the box spread futures final settlement price. The net presentvalue, in this example, is the net present value of the strikedifferential of the box spread based on the final settlement price ofthe box spread futures. Table 2 provides an example of legs that may beidentified and selected to form the options box spread associated withthe now-expired bundled box spread future.

TABLE 2 Four Legs of an Exemplary Box spread example 1 Buy 1,050 Jun-09Call @ 2 Sell 1,050 Jun-09 Put @ 3 Sell 1,080 Jun-09 Call @ 4 Buy 1,080Jun-09 Put @)

At step 708, the trade database 108, order book module 110 and marketdata module 112 may cooperate with the match engine module 106 toallocate a long position to each short position in the expired bundledbox spread futures as buyer and seller of the options box spread, andenter the purchase and sale of the box spread between the buyer and theseller of the box spread paired up by the module, at the options pricesdetermined in step 704. These options position will be commingled withother positions in the buyer's or seller's respective options (andfutures) positions that are residing in, for example, the order bookmodule 110.

At step 710, once the long and short positions have been allocated, theaccount data module 104 issues instructions to other modules such as,for example, the order processor module 136 and the clearing module 180,in the exchange computer system 100 that calls for the collection of theoptions premium from the buyer of the box spread, and the release of theoptions premium to the seller of the box spread, due to step 708. Thepositions will be relayed to risk management module 134 of theclearinghouse to determine the incremental impact for performance bondrequirement. For example, the sale of the box spread may increase themargin requirement for the seller of the box spread. With the posting ofnon-cash collateral, the option premium released in step 710 may beallowed to be withdrawn by the seller.

C. Other Operational Considerations

Prior to the expiration of the box spread futures, the futures positionsare subject to marked-to-market daily and subject to normal initial,maintenance and variation margin requirements in a normal futuresmarket. Upon expiration of the box spread futures, the buyer of the boxspread futures shall pay in cash the option premium implied by the finalsettlement price of the box spread futures. In exchange, the buyer ofthe box spread futures shall receive the corresponding options positionsin his/her account. Conversely, the seller of the box spread futuresshall receive in cash the option premium implied by the final settlementprice of the box spread futures. In return, the seller of the box spreadfutures will also receive the corresponding options positions in his/heraccount. In effect, the buyer and the seller of the box spread futuresexecute an options box spread trade at the expiration of the box spreadfutures based on the final settlement price of the box spread futures.The resulting option box spread position will then be subject to thenormal collateralization requirement imposed by the clearing house.Bundled box futures enjoy all the benefits inferred by a multi-lateralclearing system which includes a daily mark-to-market processadministered through standard futures accounting systems and held insegregated futures accounts. This further includes all the protectionsof the CME Clearing House financial safeguards package. Once the optionbox (a functional loan instrument) is delivered, it continues to becarried by the CME Clearing House in segregated accounts, likewiseenjoying all the benefits and financial sureties implied thereby. Thesesureties are particularly important in the wake of the so-calledsubprime mortgage crisis where counterparty credit risks have arisen asa significant issue. Further note that the functional loan is carriedwithin CME clearing systems where the funds may be used to meet thefinancial obligations associated with carrying positions in other CMEGroup products on an automated basis. Bundled box futures mayadditionally be quoted in terms of a rate in minimum increments or ticksthat are compatible with typical loan instruments, as well as beingtraded on a forward basis, i.e. in advance of the actual collateralizedlending/borrowing.

It should be understood that various changes and modifications to thepresently preferred embodiments described herein will be apparent tothose skilled in the art. Such changes and modifications can be madewithout departing from the spirit and scope of the present invention andwithout diminishing its intended advantages. It is therefore intendedthat such changes and modifications be covered by the appended claims.

1. A system for managing a bundled box spread future order, the systemcomprising: an order book module that receives a box spread future orderthat includes an amount, an interest rate, and a term; a match enginemodule that executes the box spread future order, wherein a longposition and a short position are priced and allocated by the matchengine module; a trade database in communication with the match enginemodule that includes four options that form the options box spread and aprice of the four options, wherein the trade database is configured toidentify a bundled box spread future associated with the received order;and an account data module that issues instructions that call forcollection of options premium from a buyer of the box spread and arelease of the options premium to a seller of the box spread.
 2. Thesystem of claim 1 wherein the allocation of positions is in an expiredbundled box spread futures.
 3. The system of claim 1 wherein the boxspread comprises a combination of four options positions with a commonexpiration date.
 4. The system of claim 3 wherein the four positions aresimultaneously purchased with the common expiration date.
 5. The systemof claim 3 wherein one or more of the four option prices are amended toensure that the resultant four options prices would imply an interestrate from a final settlement price of the box spread futures.
 6. Thesystem of claim 1 further comprising: a risk management module thatreceives the positions to determine incremental impact for performancebond requirement.
 7. The system of claim 6 wherein the sale of the boxspread increases a margin requirement for the seller of the box spread.8. The system of claim 1 further comprising: a pricing module configuredto use current market quotes from futures and options of underlyingindex futures market input to determine the price of the options in theoptions box spread.
 9. The system of claim 1 wherein the pricing of theoptions further comprises utilizing a pricing algorithm configured touse current market quotes from underlying index futures market input.10. A method for settling a bundled box spread future order, the methodcomprising: receiving an box spread future order that includes anamount, an interest rate, and a term; fulfilling the box spread futureorder; identifying a long position and a short position; pricing theidentified positions; allocating the positions to generate an optionsbox; processing the order; and updating a margin.
 11. The method ofclaim 10 wherein the updating further comprises amending one or moreoption price from the box spread future order to ensure that the one ormore option prices result in an interest rate matching a rate implied bya final settlement price of the box spread futures.
 12. The method ofclaim 10 wherein the box spread comprises a combination of four optionspositions with a common expiration date.
 13. The method of claim 12wherein three of the four option prices are determined using knownoption pricing formulas and the fourth option price is determined as afunction of net present value of the box spread based on the box spreadfutures final settlement price.
 14. The method of claim 10 wherein theprocessing the order further comprises clearing the order.
 15. Themethod of claim 10 wherein the pricing further comprises utilizing apricing algorithm configured to use current market quotes fromunderlying index futures market input.
 16. The method of claim 10further comprising: determining incremental impact for performance bondrequirement.
 17. The method of claim 16 wherein a sale of the box spreadincreases a margin requirement for the seller of the box spread.